Tag: auditor selection

“Why should we engage C.O.R.E.?”, asked the condominium board president. It is an interesting question which deserves an entertaining answer. And, even though Kubae says I should never do it, I always answer that question with another question.

“What do you hope to get from your audit?”

If you are looking for an independent CPA firm who believes that it is important to hold management accountable, then you should engage C.O.R.E. If you want to feel good that the financial information you are using for decision-making is accurate, you should engage C.O.R.E. If you want to understand how to better protect your neighbor’s hard earned money, then you should engage C.O.R.E.

If you are interviewing audit firms for your association, you may want to think about asking the following questions of the prospective firms:

Have you ever had a disagreement with management? If so, explain the disagreement and how it was handled

Who do you believe is responsible for the preparation of the financial statement?

What steps do you take to ensure that client money isn’t misappropriated by management?

How do you handle GAAP departures when management doesn’t record a transaction correctly?

What are the three biggest weaknesses you see in association accounting overall?

Who do you believe is your client?

Have you ever caught management doing something which showed a significant weakness in the internal control structure?

What did you say about it?

Did you help management resolve it?

Did you help the board understand the weakness and how to address it in the future?

Each of these questions will give you insight into how the auditor might respond to your particular needs when it comes to auditing your association’s financial statements. It is important to remember that your role, as directors, is oversight, not operations. You are there to make sure that the management team you hired is presenting accurate information that you can use in making decisions about your association.

You want to make sure your auditor takes their role as independent, objective auditors seriously. They do not need to go out of their way to find fault with management, but the reality is, they have almost total control over how your money is being spent. You should want your auditor to focus on their spending of your money to ensure it is done to support your association.

As a director, you want to feel confident that the financial information that management presents is accurate and follows some standard. How your auditor handles a GAAP departure could be important as the more management does things “their own way” the harder it is for you and your neighbors to follow it. Make sure your auditor challenges management’s accounting treatment so you get the best information possible.

You want to feel confident that your auditor is looking for risk of material errors. Your auditor should have a strong idea of what could go wrong and plan the audit for those key risk areas. Thinks like spending money over the approved budget; paying themselves above their contract without the board reviewing the additional charges; hiring businesses where there is a conflict of interest. The auditor should be on the look-out for those activities.

Keep in mind that the auditor works for the board. This means you will want to interview the auditor and approve the audit engagement letter. The audit is focused on management’s work so you never want to allow management to select the auditor. Keeping these questions and approach in mind will help you get the maximum value from your audit and auditing professional.

One of my google alerts brought an interesting article about the auditor and the relationship the audit firm has with management and the board. It seems that many boards are concerned that the auditor appears aligned with management and not the shareholders. This is, sadly, not a new problem, but it is one that C.O.R.E. is trying to address is our own little world of auditing.

At C.O.R.E., we understand our loyalty lies to the reader of the financial statements – that is, the shareholders. We are engaged by the board on behalf of the owners to audit management. Ensuring that current and prospective owners get the best information about their association is key to our success, but sometimes getting owners the best information means upsetting management.

Upsetting management, however, potentially hurts the pocketbook of the auditing CPA firm. In many situations, management offers very profitable consulting opportunities to the auditor. Systems design, software evaluation, and other arrangements are absolutely essential to the financial health of an organization and a CPA is highly qualified to offer those services. The problem is the potential for the auditor to be compromised – that is, does the auditor get the consulting gig because they went soft on management?

If you don’t think it is a very real possibility think again. Can you imagine anyone hiring a consultant who just got through bashing them? If a CPA firm had the chance to earn $100,000 consulting with management or $30,000 auditing the client (or both hopefully), is it possible that the auditor might turn a blind eye to a problem found on audit for the chance to earn more money?

And in the small and medium sized entity market, it is potentially even more painful. The small CPA firm gets most of its new business by referral. But referrals are hard to come by when your work upsets management. This has impacted us directly – we have had to issue specific communication about management violating internal control systems to an entity’s board. The Chair of the board was also the president who hired his son, the person who broke the rules. That organization and six other companies found a new CPA firm because they wanted someone less “negative”. Seven entities is a lot of billing. Financially, would we have been better off remaining silent?

This is not an attempt to justify the auditor’s failure to live up to their responsibility to protect owners and stakeholders. An auditor who accepts a consulting job with a client needs to consider it a bribe, or worse, an attempt to make them complicit in management’s failure. That is the auditor’s failure.

But the greater failure is on behalf of the boards of directors who have the primary responsibility to protect the shareholders. When you ask management to interview auditors, when you accept management’s recommendation to terminate the CPA, when you accept management’s excuses for their misdemeanors, you are abrogating your responsibility.

But you can start to address the problem. It will require boards to start holding management accountable. And, when it comes to engaging the auditor to attest to your organization’s financial statements:

You, not management, should

request proposals from auditors

interview the auditor

determine if the auditor takes any fees from management for consulting

ask how auditors get clients – board or management referral

never allow management to dictate non-GAAP policies without auditor approval

interview new auditors every 3-5 years

demand that the auditor refuse to accept any consulting arrangement with management

As long as the board, or its audit committee, continues to allow management any involvement in the process of selecting, engaging and compensating auditors, this problem will not go away. The board must make it clear to management that the auditor is the board’s tool to review management and its adherence to appropriate accounting policy and not someone who is there to help management look good. And the board must make it clear to the auditor they look to them to protect the owners and their investment. This is your chance to hold both auditor and management accountable, will you step up to the challenge?

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Sites to Consider

www.HOATaxHelp.com

If you are looking for a low cost, very easy to work with site to prepare your 1120-H, check us out. A few pieces of important information and done! Very reasonably priced.

www.core-acct.com

C.O.R.E. provides very reasonably priced audits and reviews of HOA's and condo associations. Very big on automation and electronic documentation to save time and money.